This is the Most Misunderstood Number in the Mortgage Business 

This is the Most Misunderstood Number in the Mortgage Business 

The Annual Percentage Rate, or APR, is often the most misunderstood number consumers see when applying for a mortgage.

Even though consumers are provided mounds of documentation explaining various processes, closing costs and cash-to-close requirements, it seems the APR is the number that causes more head-scratching than others. Too often, even the individual loan officer can’t explain the APR without getting confused or worse, telling the applicant that it’s not really that important and to ignore it. The note rate is used to calculate monthly payments, not the APR.

The explanation is this: The APR represents the cost of money borrowed expressed as an annual rate. That’s it. It’s that simple.

How is it calculated?

It’s a combination of the note rate, the rate used to calculate a monthly principal and interest payment with a nod toward certain closing costs needed to get a particular rate. Lender fees and other third party services may also be needed, and they all need to be paid for at the settlement table, referred to as finance charges. But upon an initial application where disclosures are required by statute to be prepared and delivered to a borrower, the APR must be disclosed at the same time.

APRs are supposed to provide consumers with the ability to shop around for rates and compare one lender to another. The thinking is if one lender has a lower APR than another, then the lender with the lower APR is offering the best deal. But that’s not really the case. APRs can vary based upon the term of the loan, closing costs and which day the APR was initially prepared. An APR for a 15 year loan will be different than the APR for a 30 year loan even with the exact same loan amount. APRs are good consumer tools, but only if properly used.

The key is the difference between the note rate and the APR. If there is somewhat of a large disparity between the two, that tells you there are more fees involved. An APR where the difference between the note rate and APR is relatively minor, tells the borrower there are fewer prepaid finance charges needed to get the desired rate.

Here’s an Example

A borrower gets a note rate of 3.25 percent and the APR is disclosed at 3.27 percent. Now, the borrower gets a note rate quoted at 3.25 percent and the APR is 3.50 percent. This is all for the exact same loan term and loan amount, remember. The loan with the 3.27 percent has fewer finance charges needed compared to the 3.50 percent number. Lower finance charges provide a lower APR number.

When you receive your loan disclosures, review your documents carefully and look for the APR number in the file. It will be there. If you have any questions about the APR, simply call me and we’ll review together. But put simply, the APR represents the cost of money borrowed expressed as an annual rate.

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Hamilton for Heroes: Now Available to Help Even MORE Heroes!

Hamilton for Heroes: Now Available to Help Even MORE Heroes!

DID YOU KNOW?: The Hamilton for Heroes mortgage program is not only for active and retired Military and Veterans. These benefits are now available to active Police Officers, Firefighters and Emergency Medical Technicians (EMTs).

We want to thank our Heroes for helping to make our communities safer places to live! When our Heroes purchase or refinance a home, we will waive our lender fees (a value of $1,590).

  • First responders (firefighters, police officers and EMTs), active and retired military, veterans and surviving spouses are eligible
  • No limit to the number of times an eligible borrower can take advantage of this offer
  • A variety of Hamilton purchase and refinance loan programs are eligible for the offer in addition to VA loans
  • VA loans offer additional benefits such as no down payment and no mortgage insurance to military personnel
  • Dedicated service from a team of mortgage experts who understand the unique needs of our heroes
Please call or email me today to learn more about how we can work together to help our Heroes become homeowners! You can also apply online.
Gift of Equity Conventional Loan

Gift of Equity Conventional Loan

Most families will go above and beyond the call of duty to help each other out. But have you ever heard of a relative selling a home to another relative with no down payment? It happens; it happens all the time. The down payment comes in the form of a gift of equity, and it can be extremely beneficial to the buyer on a conventional loan.

Understanding the Gift of Equity

When a buyer owns a home that is worth a lot more than the mortgage balance, the difference is called equity. In the case of an retired person who has paid on a home since the Johnson administration, they may have only a few years left on their mortgage, thus they have a lot of equity on their home.

Example: if someone purchased a house 22 years ago with a 30-year mortgage, they would have only 8 years left on their home loan. If the home is currently worth $250,000 but the balance on the existing loan is only $62,000, then that would mean the owner has approximately $188,000 in equity. Not too shabby, eh?

But here’s where the gift of equity comes in: instead of asking a home buyer to come up with a 20% down payment, the owner could gift 20% of the home’s value to the buyer. This would allow the buyer to apply for a loan that is only 80% of the home’s value.

A Hypothetical

Here’s a hypothetical example:

John is 28-years-old and would like to buy a home. His parents have been paying on their home for 22 years. The balance of their mortgage is currently $62,000. The home is valued at $250,000. The parents would like to downsize and sell their home to John.

The parents offer to sell the home to John for $250,000. However, they also offer a gift of equity of $50,000. Therefore, John will need to contact his mortgage lender and apply for a loan of $200,000. This would allow his parents to receive a profit of $138,000 after giving away the equity to their dear, beloved son and paying off the old mortgage.

Saves the Borrower from PMI

One of the best advantages of the gift of equity is avoiding private mortgage insurance (PMI). Since a conventional loan charges PMI any time the borrower gets a mortgage over 80% of the home’s value, the gift of equity avoids this charge. Over the course of the loan, the lack of PMI could save the buyer thousands and thousands of dollars.

Who Pays Closing Costs?

As with any conventional mortgage, there will be closing costs involved. The home appraisal, recording the deed at the local county registrar’s office, property taxes, and several other items will all need to be paid at the closing attorney’s office when the deal is closed. For a conventional loan, guidelines state that the seller may pay up to 3% of the sales price in concessions towards closing costs.

Going back to our example of John and his parents, this would mean the parents could provide $7,500 towards the closing costs, reducing the amount of profit they receive from the transaction, but still allow them to assist John with the purchase of the property.

Potential Tax Issues

Warning: if you have a phobia of the IRS (and who doesn’t?), a gift of equity may result in some tax issues. The Feds put a limit on the amount of cash or equity that a person can give to another. For example, for the year 2019, the maximum amount of money or equity that can be given to a person is $15,000. Any amount that exceeds this limit will result in the giver of the gift being required to fill out certain forms with their annual tax return. It is best to consult with a local accountant that is familiar with gift and estate taxes in order to get the correct answer about tax consequences with a gift of equity.

True Value of the Home

Your prospective home will need to be appraised by an independent rep in order to determine the home’s actual value. For instance, in the above example, if the parents were trying to sell the home for $250,000 but the appraiser calculated the home’s worth at only $190,000, then the lender would not allow the transaction to go through. The sales price would have to be lowered along with the size of the equity gift.

Only Allowed with Family Members

According to conventional loan guidelines, there are some restrictions on the gift of equity transaction. Specifically, the seller of the home must be directly related to the buyer. The lender will want to see a transaction between a parent and child, or a grandparent and grandchild or an Aunt/Uncle to a nephew or niece. It is not common for a 6th cousin twice removed on the mother’s side to sell to a distant relative.

Documenting the Gift of Equity

Lenders may want to see a letter from the giver to the recipient. In a nutshell, the letter will need to describe the relationship between the two people, the amount of the gift of equity along with a statement that this is truly a gift and there is no expectation that the amount will be repaid. Your local lender can provide a template of the letter for you to use in order to satisfy this requirement.

Summing Up Gift of Equity Conventional Loan

Completing a gift of equity transaction will take planning and negotiation between both sides, but at the end of the day, it can be a huge benefit to the buyer. This is one of the few ways of buying a home without the need for a large cash payment, and without having to purchase private mortgage insurance. It is also a commendable way for a person to significantly help out one of their relatives without giving them a huge chunk of cash, while still taking advantage of the equity in their home.

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Should You Use a Cosigner?

Should You Use a Cosigner?

Getting someone to agree to cosign on a mortgage with you means someone else has agreed to pay your mortgage for you should you no longer be able to do so. Yet while cosigning can help in some instances it’s not as pervasive a practice as it used to be. Lending guidelines have slowly pared back the benefits of cosigning sometimes to the point where it really doesn’t help very much after all. If you’re on the receiving end of such as request, it’s important to note that this is a real commitment and not something to be taken lightly.

When you agree to cosign on a mortgage, that information will very soon appear on your own credit report. You may not be making the monthly payments and perhaps over time you might have even forgotten about making that agreement but each and every month the primary borrower’s payment history on that mortgage is also being reported to your credit history. If for example the primary borrowers miss a payment and is made more than 30 days past the due date, your credit scores will be hit. Often without your knowing about it. Just make sure that when you agree to cosign you feel comfortable about doing so and looking at a recent credit report on those who are asking you for help.

Another way a cosigner can help is with additional income. Someone may have a temporary situation where income is lower than it normally is, or perhaps someone is buying a home but has yet to start the new job. Adding a cosigner can help with the additional income. But remember, with the additional income also comes additional debt from the cosigners. All income and credit obligations are added together.

One final note, a cosigner can’t erase bad credit of the primary borrower. If a couple applies for a mortgage and their credit isn’t up to par, in the past seeking out a cosigner could be an answer. Yet today, good credit from a cosigner doesn’t erase the bad credit of the primary borrower.

Your Home Loan Application Was Declined – Now What?

Your Home Loan Application Was Declined – Now What?

If your mortgage loan was declined, it’s not the end of the world. It’s just a temporary setback.

There are many reasons why the lender says no to a buyer, but the most common reason is the Debt-to-Income Ratio is too high. If you owe too much of your monthly income on debt, they are more of a credit risk. Lenders have varying DTI limits, but you’ll find that 43% is the highest ratio a buyer can have and still get a qualified mortgage.

Key Points Regarding A Mortgage Decline:

  1. People are usually surprised that their credit is insufficient. Most of us don’t look at our credit score at all, or we only give a cursory look. Most often, applicants are checking their credit on one of the free online resources. While these sites are helpful, they are not as in-depth as what a lender is looking at. Lenders look at the entire credit profile, including credit history, debt-to-income ratio, employment, and other factors.
  2. Don’t give up. Having good credit isn’t a sprint; it’s a marathon. You can spend a few months or maybe up to a year to get mortgage-ready. When you find out exactly what you can do, whether it is decreasing your debt, or paying off any collections, you can take the steps necessary, and be able to get back to searching for a home. Owning a home is a life goal for many people. Buying a home is likely the largest financial purchase most people make, so it makes sense that it may take some time to prepare for it. This is why we encourage people to not only get pre-qualified, but pre-approved for a mortgage.
  3. Most of the time the debt-to-income problem is due to credit card payments. The good news is that credit cards are the easiest to take care of. However, they need to be taken care of in a strategic way; guidance from a credit counselor or a lender is helpful.
  4. It’s a good idea to check your credit report and know what your credit and debt situation is before you call a Realtor® or a lender. Know what’s on your credit report. You are able to access a free credit report each year from the top credit reporting agencies:  Transunion, Experian, and Equifax.
  5. If you don’t have little or no credit, it can take longer to build it. FICO® Scores are the credit scores used by 90% of lenders to determine your credit risk. The FICO score is based on several things, including your payment history. The longer the history, the better, but you will need at least 12 months of credit payments of some kind. If you don’t have enough credit, you’ll have to establish it and make timely payments to build it up.

How Underwriting Works

When you get declined by a lender, it doesn’t mean you shouldn’t buy a house, it just means you have a little work to do before you can. Working with your lender or a credit counselor can help you meet the criteria.

The loan officer (that’s me!) is the one who packages your loan. They know generally what the underwriter is looking for with each loan product and will collect the necessary paperwork from the borrower. Then they will turn it all over to the underwriter within 72 hours to a week before the scheduled settlement.

Underwriters decide whether to approve the loan, decline the loan, or if there is a third determination, suspend the loan. In this case, the borrower would be asked to supply additional documents to satisfy the underwriting requirements.

The underwriter usually wants to view the previous 12 months of financial activity. The FICO score also weighs the most recent 12 months more heavily. So, if you are declined for a mortgage, the good news is that you can make the changes necessary to improve your credit-worthiness within 12 months. In the grand scheme of things, that’s no time at all!

Apply today to see if you are pre-qualified for a loan!

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